M6 BARRON’S September 30, 2019
EuropeanTrader
Jewelry Maker Loses Sparkle
ByRupertSteiner
LUXURY-GOODS COMPANY COMPAGNIE FINANCIERE RICHEMONT COULD BE OVER-
valuedduetopoliticaluncertaintyinHongKongandslowingmomentumfor
its star Cartier brand.
The stock of the Swiss-listed watch and jewelry maker, which also owns
high-endVanCleef&Arpels,Dunhill,andMontblanc,hashadagoodrunin
the past three years, up 31.4%. Richemont (ticker: CFR.Switzerland), along
withotherbigplayers,hasshruggedoffconcernsofaconsumerslowdownand
trade tensions, with rivals LVMH Moët Hennessy Louis Vuitton
(MC.France) gaining 147%, and Tiffany (TIF), 29%, over the same period.
ButduetoitsproductmixandexposuretoAsia,Richemontislikelytosuf-
fermorethanmostfromdisruptioninHongKong,depreciationoftheChinese
yuan, and macro issues engulfing the region.
Analysts at UBS have warned the situation in Hong Kong will have a 2%
negativeimpactonRichemont’sorganicsalesgrowthnextyear.UBShasaSell
ratingandatargetpriceof68Swissfrancs($68.49),10%lowerthanitscurrent
CHF75.04.OverthepastthreemonthsRichemonthasseen8%wipedoffits
stock,comparedwitha1.3%and1.8%fallatLVMHandTiffany,respectively.
“WebelievetheslowingCartierbrandperformanceandnear-termindustry
headwinds,whicharesettoputgroupmarginsunderpressure,arenotpriced
in,” UBS analysts wrote in a Sept. 17 note.
Hong Kong is a vital market for Richemont, contributing about 11% to
groupsales.ThecrucialChineseconsumeraccountsforabout40%ofallsales.
Whenaskedforcomment,thefirmpointedtoitsJulytradingupdate.“Sales
inHongKongretreated,additionallyimpactedbytherelativestrengthofthe
Hong Kong dollar and the recent street protests,” the company said.
Richemontisthethird-largestluxury-goodsfirmbysales,
behindLVMHandEsteeLauder,accordingtoanannualre-
port by Deloitte. Richemont, which is based in Geneva, also
owns online retailer Yoox Net-a-Porter and gun maker Pur-
dey. It has a market value of $40 billion and employs about
30,000peoplein36countries.Thestockispricedat21timesforwardearnings,
a10%premiumtoitspeers,andthecompanypostedoperatingprofitof€1.9
billion for the year ended March 31, 2019, on sales of €13.9 billion.
Ittracesitsheritage tothe1940s,whenthelateSouthAfricabillionaireAn-
tonRupertcreatedconglomerateRembrandt.Ithadinterestsintobacco,finan-
cial services, wines and spirits, and gold- and diamond-mining industries, as
wellasluxurygoods.In1988,RembrandtGroupspunoffsomeofitsinterna-
tional assets to form Richemont.
UBShassourceddatathatlooksattheappealofRichemont’slargestbrand,
Cartier, which UBS says accounts for 80% of group earnings before interest
and taxes. UBS has monitored the brand on social media and online search
sites to gauge interest. Cartier has nine million followers on Instagram, but
inAugust“likes”perpostweredown7%comparedwitha55%increaseinJuly,
UBSnoted.Cartieralsohashada30%year-on-yeardeclineinreadsperpost
on the Chinese social-media platform WeChat, according to UBS.
ThecompanyhaslaunchedanewjewelrylinecalledClash,andCyrilleVi-
gneron,Cartier’schiefexecutiveofficer,saidinaMarchstatementthat“Clash
is super positive, the fastest launch we ever had on such a launch category.”
Cartierneedstoinnovatemoreinordertoremainastarbrand,otherwise
Richemont will lose its sparkle.
European
Markets,
pageM26
EmergingMarkets
Electric-Car Battery Dilemma
ByCraigMellow
YOU CAN BET ON ASIA’S LEAD IN ELECTRIC-VEHICLE TECHNOLOGY. BETTING ON THE
companies involved is trickier.
WhiledignitariesdiscussedclimatechangeattheUnitedNations,therace
toreplacecarbon-spewingautomobileswasonhalfaworldaway.Fiveofthe
topsixelectric-carbatteryproducersareSouthKoreanorChinese,saysJames
Lim, who heads Korea research at Dalton Investments.
The only developed-market firm in the mix is Japan’s Panasonic (ticker:
6572.Japan).Korea’sbatterybigthree— LGChem (051910.Korea), Samsung
SDI (006400.Korea),and SKInnovation (096770.Korea)—areleveragingexist-
ingexpertiseincellphonebatteries.Chinesechampions ContemporaryAm-
perexTechnology ,orCATL(300750.China),and BYD (1211.HongKong)were
willed into existence by generous industry subsidies from their government.
Thesecompaniesshouldintheorybeexcitinginvestors.Withdominantauto
makersfromVolkswagentoGeneralMotorsbettingonanelectricfuture,de-
mandforbatterieswilloutstripsupplyforatleastthreeyears,Limpredicts.
LGChem,viewedastheindustryleaderfornow,hasa$100billionorderback-
log.Marketsarecautiousanyway.Allofthebatterymakers’stockshavede-
clined this year except Samsung SDI, which is up 7%.
OnebigreasonisthatChinaslammedthebrakesonstatesupportthatwas
propping up some 500 companies in the electric-vehicle space, says Jack
Barkenbus,avisitingscholaratVanderbiltUniversity.Beijingshrankthesub-
sidypiebysome60%thisyearandmaycutfurthernextyear.SharesinBYD,
which puts most of its batteries in its own cars, have slid 22% year to date.
CATL, a purer play on batteries, has gotten off with a 3.5% dip.
The longer-term problem is knowing which horse to back in an emerging
industry. Global auto makers may make life tougher for battery suppliers by
manufacturingtheirowndowntheroad.“We’renotverykeenoninvestmenton
EV,” says Michael Oh, lead manager of the Matthews Asia Innovators fund.
“Eventhoughindustrygrowthisverystrong,there’salotofcompetitioncoming
in.”There’salsotheissuethatmakingEVbatteriesisamoneyloseratpresent.
TheKoreanplayersarealsoweigheddownbytheirrootsinthemultitenta-
cledconglomeratesknownas chaebol. ThecorebusinessofbothLGChemand
SK Innovation is oil refining and petrochemicals, Lim says. Batteries were
pastedinatsomepointbyheadquarters.LittlewonderthatsharesinSamsung
SDI,abattery-focusedspinofffromtheelectronicsgiant,areoutperforming.
Thingsmaygetbetter.Electric-carbatterymanufacturingwillturnprofit-
ablebyearlynextyear,Limpredicts.NewEuropeanUnionregulationsshould
stimulate the industry there starting in 2021. Brussels will cut auto makers’
fleet-widecarbon-emissionstargetsby20%.Chinesecompaniesthatsurvive
thesubsidycutbackwillbefirmerontheirfeet,withCATLprobablyinposi-
tiontocompeteglobally,saysSimonWebber,portfoliomanagerfortheHart-
ford Schroders International Stock fund. “The next 12 months is tricky,” he
says.“ButI’moneofthebullsonprofitabilityfromtheendof2020onward.”
Fromrailroadstodot-comsandsolarpanels,manyearlyplayersintransfor-
mative industries failed, and investors took their chances. What’s new about
electric-carbatteriesisthatthey’rebeingpioneeredinemergingmarkets.The
purportedlyadvancednationsarestragglingbehind,despiteU.S.-basedTesla’s
planstosupplyitsownvehicles.“TheU.S.willnevergetaheadoftheAsians
in lithium-ion batteries,” Vanderbilt’s Barkenbus says. “Maybe we can catch
them in the next generation, solid state.”